In these unprecedented days, companies may be looking to realign market position through the acquisition of assets or by adding to strategic investments. Frankly, there may be some good deals out there with interests rates at historic lows – return on investment calculations that were unfavorable under higher cap rates are now quite attractive. However, the old maxim of caveat emptor still applies even in these low interest rate times, particularly when purchasing a distressed asset with potential environmental concerns.
This is the first in a series of posts regarding what to look for in these deals.
This first post deals with the issue of successor liability.
The first thing everyone looks to do when purchasing a distressed asset with potential environmental concerns is to structure the deal as an asset sale. While this is an important first step (if it is otherwise feasible in connection with other deal considerations), it is by no means the only step to shield the buyer from the pre-closing environmental liability of the purchased asset – and any purchaser that takes a distressed asset with potential environmental concerns who thinks that the mere fact that “it was an asset sale” will shield it from pre-closing environmental liability of the purchased asset will likely be mistaken in the post-pandemic world. This is because not only does existing case law provide a number of ways to reach the buyer for pre-closing historic environmental liability in an asset sale, but also we can expect post-pandemic case law to read these doctrines even more narrowly.
- What is the existing case law regarding pre-closing environmental liability of a buyer entity in an asset sale?
The full scope of analysis of successor liability in an asset sale is varied and nuanced and beyond the scope of this blog post. Suffice to say, the rule of non-liability has four traditional exceptions, where: (i) the buyer expressly or impliedly assumes the seller’s liabilities; (ii) the transaction is a consolidation or merger of the seller and buyer; (iii) the buyer is a mere continuation of the seller; and (iv) the transaction is entered into with the intention of defrauding the seller’s creditors. The buyer has to be very careful to craft the sales agreement and paper the record as well as act in a way that does not trigger any of these exceptions. In many instances, this can be a tightrope walk from a deal structure standpoint. Savvy buyers need savvy deal counsel in the best of times to help them negotiate this minefield when there is significant pre-closing environmental liability at stake.
- Where can we expect post-pandemic case law to go?
Post-pandemic, two things will be true: (1) we can expect a lot of asset sales where the pre-closing environmental liabilities were left with the seller, but those sellers post-pandemic might not have the wherewithal to address the pre-closing environmental liabilities, and (2) we can expect governmental agencies and third-party plaintiffs to look for “deep pockets” (read: new buyers) to address the cleanup. These entities will get creative and push for even more narrow readings of existing case law in light of the “exigent circumstances” of post-pandemic reality. These entities may even push for case law that creates new “exceptions” to the traditional exceptions to the rule of non-liability. In light of this, proactive buyers should take a look at each of the properties associated with potentially-for-sale assets and prepare an analysis during pre-closing diligence of what environmental concerns exist at those assets and whether those concerns can be addressed by the seller-entity left with the liability post-transaction. Proactive buyers should work closely with counsel to develop the necessary documents and evidence to put the buyer in the best position to avoid liability for pre-closing environmental liability post-closing.